You Have Insurance, But Do You Understand It?



You Have Insurance, But Do You Understand It?



Ensure that you understand your insurance.


Flooding damages a lot of homes every year, so many learn something about their insurance coverage – for better or worse. Usually the surprise comes from not having looked at the policy for years. The fact is everyone needs to review their insurance policies periodically and make changes when appropriate.  


Whatever type of insurance you own or are considering, having a better understanding of the questions to ask, issues to watch out for, and options that may be available are all very important. When you need the insurance pay-out the most, you may not have it.  


Life insurance is a perfect example.


“Although a rigorous financial plan will likely evaluate any current life insurance protection needs, and recommend and implement new life insurance coverages as required, the ongoing review process for existing life insurance policies often receives far less attention,” says Michael E. Kitces, CFP, CLU. 


Term insurance is certainly the most straight-forward form of life insurance available. The proposition is simple: Each year you pay the cost of the life insurance and, in exchange, you receive one year of coverage.


Kitces notes that given how common it is to find term policies today that are designed to last for a certain number of years (e.g., “10-year term” or “30-year term”), understanding what happens to the policies beyond the time period is important. 


  • Does the coverage automatically lapse or can it be continued at a new premium schedule based on the insured’s age at that time and what are those premiums scheduled to be? 
  • Can the insurance company require the insured to provide new evidence of insurability (i.e., go through the underwriting process again) if coverage is continued past the guaranteed period? 
  • Does the policy offer an option to convert the coverage to a permanent life insurance policy without evidence of insurability? 
  • Does the conversion option last the entire duration of the policy or is it for a limited time period? 


There are several reasons to reconsider your existing term coverage today, including lower costs due to improved health status. Term replacement is also a strong option to consider if there has been a change in the original time horizon needed for coverage. For instance, if a 45-year-old person is five years into a 20-year term policy that has limited extension or conversion options, and believes they will need coverage until age 65 rather than 60, replacing that policy with a new 20-year term policy that will last until age 65 may be more effective.


It’s important to know what decisions will or will not be needed at the “end” of a term insurance policy, so at least a plan can be in place should circumstances change. Will it ever be possible to extend the term insurance policy further?  Will conversion always be an option?


Ensure that you understand your insurance.



The above material was prepared by Peak Advisor Alliance.